US dollar hawks weigh on stocks and commodities, UK retail sales

06:00, March 24th 2016
· By Michael Hewson

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A week ago the market was caught by surprise at how dovish the Federal Reserve was with its statement and subsequent press conference from Janet Yellen, which more or less at the time put paid to any thoughts of an April rate rise.

It’s taken less than a week for this narrative to reverse, begging the question as to what has changed in such a short space of time to prompt such a change of tone.

The rebound in the US dollar along with a sharp drop in the oil price prompted a sharp selloff in US markets yesterday which is likely to feed through into a lower European open this morning.

A succession of Federal Reserve policymakers have come out in recent days suggesting a rate rise in April is a real possibility, which rather begs the question as to why there was so little dissent over the decision itself last week. Granted, the majority of this week’s speakers haven’t got a vote on the committee this year but the level of hawkishness does jar somewhat with last week’s dovish message, and could present problems for Janet Yellen if the economic data shows significant signs of improvement between now and the end of April.

The change of tone also undermines the credibility and consistency of the FOMC’s message to the markets at a time when sentiment still remains fragile and emerging markets remain vulnerable to the strength of the greenback.

Rising concerns about inflation appear to be driving some of the dissent surrounding last week’s dovish policy message and while there does appear to be some evidence of rising price pressure in the core components, the fact remains that wage growth remains stubbornly weak, as does US consumer spending.

Retail sales have remained weak while durable goods have also flattered to deceive. While we saw a decent jump in the January numbers of 1.7%, the February numbers are expected to slip back with a decline of 0.3%. Last year durable goods excluding transports declined by 2.3%, and so far this year the pattern of spending has remained weak.

Before that though we get the latest data for UK retail sales for February which are expected to slip back after a strong January.

The UK consumer has always been a fickle creature, with the latest January retail sales numbers showing a nice rebound in the January numbers of 2.3%, after a disappointing end to 2015 and a decline of 1.4%.

It would be entirely understandable for the February numbers to disappoint given some of the recent weaker than expected economic data that we’ve seen from all sectors of the economy. The recent flooding and bad weather could well also have acted as a slight drag on sentiment.

The recent services PMI data would appear to suggest that some of the recent dynamism in one of the best performing sectors of the UK economy has started to ebb away.

All in all that’s not altogether surprising given the gloomy doom laden picture being painted by the “remain” campaign in the event the British people decide to vote against the status quo in June.

While it is entirely understandable that the disadvantages of a possible exit vote are outlined, some of the narrative coming from the “remain” camp has bordered on ludicrous scare mongering. That’s not to say that the “leave” campaign have been any better, they haven’t, but the overall tenor of the campaign is likely to cause the very slowdown that the government should be keen to avoid.

The behaviour of both sides has been more akin to errant school children squabbling in the playground over who’s got the better toys. The level of debate from both sides has been pitiful. Maybe we should get Harry Hill to officiate and decide which is better?

We only need to look at the sharp declines in sterling to see the effects of the dire negativity coming from both camps.

Retail sales on an annual basis are currently at 5% and with average earnings still trending above the inflation numbers increases in consumers disposable income continues to move in the right direction.

While the gap between prices and wages has been converging in recent months, wages continue to rise at a rate of 2% on a quarterly basis, while this week’s inflation numbers showed a rise of 0.3% on an annualised basis despite a sharp 0.8% drop in the monthly numbers in January.

Whatever the data shows the prospect of a strong rebound in sterling remains a difficult prospect given the continuing uncertainty surrounding this summer’s referendum, as both sides ramp up their respective narratives.

EURUSD – having failed to break through the February highs at 1.1380, the euro has continued to come under pressure slipping below the 1.1200 area. The 200 day MA at 1.1050 remains a key support with only a move below 1.1030 arguing for a move towards 1.0800.

GBPUSD – the pound has continued to come under pressure sliding below the 1.4140 level, trend line support from the recent lows at 1.3835, which suggests we could well see a move towards 1.4080, and potentially the previous lows.

EURGBP – the euro continues to rub up against the 200 week MA at 0.7935 and the highs this year. A weekly close above 0.7935 suggests a move towards 0.8100, while a failure argues for a drift back down towards 0.7820.

USDJPY – a marginal new low at 110.65 keeps the downside pressure intact with a view to a move towards the 106.00 area. This bias remains intact while resistance at 114.80 remains intact. Above 115.00 argues a short term base is in place.

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